The Herbalife Icahn Squeeze Could Be Coming in March

By Brendan Conway

Even close watchers of the Herbalife (HLF) saga may have missed the significance of activist investor Carl Icahn’s use of the health-products company’s equity options.

Gonna squeeze ya a bit here.

Icahn built most of his Herbalife position with options on 11.5 million shares, D.A. Davidson & Co. analyst Tim Ramey notes this afternoon. Federal Hart-Scott-Rodino rules require a waiting period before Icahn can turn those options into stock. The period should end “on or about March 6, Ramey writes. Icahn can then yank those shares out of the securities-lending market, where short sellers turn to borrow Herbalife’s stock. Since HLF is already hard to borrow, that’s going to put upward pressure on the stock.

“[T]he impact of his position, quite apart from any actions he may take after the HSR review period, could be felt in early March,” Ramey writes.

In short (so to speak), an Icahn squeeze could be coming. From Ramey’s note following today’s Herbalife conference call:

Not from the call, but we think it important to restate. Carl Icahn’s long position of 11.542 million options and 2.47 million shares of common stock was created quite intentionally to allow him to move beyond the Hart-Scott-Rodino pre-notification limits. Under the HSR rules, an acquirer may acquire only a certain amount of stock if it intends to hold voting securities for any purpose other than “investment” only. Since Mr. Icahn does seek to influence the company to improve the value of the stock, he could only acquire the 2.47 million shares of voting common and built the rest of his position with long calls or short puts. When the HSR waiting period is over (typically 30 days or on about March 6th) Mr. Icahn could convert the 11.5 million synthetic shares to a long holding of common stock, which will then allow him to remove those shares from the potential borrow. So the impact of his position, quite apart from any actions he may take after the HSR review period, could be felt in early March.

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Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.